South Africa’s most broken piece of infrastructure, its public finances, is functioning again. That is the message Finance Minister Enoch Godongwana is expected to deliver this week when he tables the Medium-Term Budget Policy Statement, with figures confirming that last year marked the peak of the debt-to-GDP ratio and that the curve has now turned downward.
The starting point was grim. By the end of the Zuma administration, government was on a downward path toward bankruptcy, with spiralling debt, falling tax revenues and state-owned enterprises in permanent need of multi-billion-rand bailouts. Between 2008 and last year, debt ballooned from under 30% of GDP to about 79%. Lenders grew nervous, interest rates rose and credit rating agencies cut the country’s debt to junk. The higher cost of borrowing hit not only government but every business operating in South Africa, and firms fearing a financial catastrophe cut back on investment.
The turnaround rests on spending discipline at National Treasury, which has held the line against unaffordable demands for increased consumption spending while trying to protect the investment spending that can underpin renewed growth. Treasury has used the medium-term expenditure framework guidelines to impose that discipline. Additions to the overall budget are considered only once savings have been found. Revenue exceeding forecasts can finance temporary needs or debt reduction, but never permanent spending. Compensation budgets are capped, forcing departments to manage staff numbers within them.
The result is that government has stayed within the spending ceiling it set with each budget and has directed windfalls toward reducing the debt load. Markets have taken notice: the premium investors demand to hold South African government bonds over international benchmarks has narrowed, partly because perceived risk has fallen. That saves money otherwise spent on debt service, and a stronger rand has further reduced the cost of servicing hard-currency debt while shrinking the value of the amount outstanding.
Meanwhile, the state-owned enterprises tell a similar story of delivery improving. Eskom is back to being profitable, removing the need for constant bailouts beyond the agreed debt management plan. Transnet is gradually improving its financial position and last month reported an annual profit, though thanks to one-off sales, and debt guarantees remain a drag on the national position. Bailouts are largely a thing of the past. South African Airways, the Post Office and the SABC remain financial headaches, but no longer at the level of constant bailouts. The Post Office is in business rescue, positioning itself to stop draining the fiscus.
The improved scenario prompted S&P to upgrade South Africa’s credit rating last November and Fitch to follow last June, and further upgrades are expected after this week’s figures. Upgrades feed a virtuous circle: borrowing costs fall, freeing spending for other priorities. Because corporate borrowing rates are capped by the sovereign’s, better government ratings also mean cheaper credit for businesses, making investment easier and extending the circle further.
The discipline is also set to gain a legislative underpinning. An update is expected this week on the proposed fiscal rule, a clear and strong anchor for government spending that investors and businesses can rely on, one that would sharply reduce the risk of a future debt blowout.
What the repair job has not yet produced is growth. The economy is expected to grow barely above 1% this year, leaving little momentum to support improving government revenues. The fact that revenue has beaten forecasts owes more to better collection efforts and supportive commodity prices than to economic expansion. Still, the ingredients for growth are being assembled, including structural reforms in the network industries that have delivered reliable electricity, cheaper data and improved logistics. Growth is now the major focus of the business-government partnership.
One fiscal lever could accelerate that shift: government investment. Despite more than a trillion rand being budgeted, infrastructure spending has consistently fallen short. Treasury can redouble its efforts to support departments and local government in implementing infrastructure projects, and business has said it stands ready to help.
Hurdles remain, above all the financial mess in local government and its knock-on effect on the Eskom balance sheet and local service delivery. But the week offers a moment to take stock of real progress, and credit is due to Treasury director-general Duncan Pieterse and his team. Turning reform into real growth is the task ahead, and doing so from a stable fiscal position makes it considerably easier.